In his Dec. 26 commentary, "The high cost of failing to police public plans," Martin Stempel perpetuates three myths regarding the financing of state and local government pension plans.
But the truth differs from the myths regarding pension plans covering employees of state or local government.
Myth 1: Public plans typically ignored inflation in computing annual contributions and fund their plans with annual contributions that do not reflect how inflation will increase the cost of the benefits each employee earns.
Fact: Typically means more than half. This point is simply not true. I don't know of any major actuarial firm, including my own, that ignores inflation. To ignore inflation would violate a principle of the Actuarial Standards Board, established by the American Academy of Actuaries. A 1993 survey of 450 public plans by the Public Pension Coordinating Council (an affiliation of several public sector groups that deal with retirement issues, including the Government Finance Officers Associations, National Council on Teachers Retirement, and the National Association of State Retirement Administrations) reveals more than 92% of active members of state and local defined benefit plans are in plans that include an inflation assumption in the actuarial calculation of employer contributions.
Myth 2: Governments can promise their employees whatever benefits they choose and at the same time legislate inadequate contributions, and they've done just that.
Fact: A few governments have done that, and been roundly chastised by the news media. But they are a very small minority. The vast majority of governments are practicing sound level annual contribution financing, paying for benefits as they accrue. As an example, the 1993 Public Pension Coordinating Council survey results show 70% of active members in state administered plans are covered by plans that are subject to funding standards established by state law.
Myth 3: There are no "pension police" to enforce adequate annual contributions, because Congress didn't bother to enact a counterpart of the Employee Retirement Income Security Act of 1974 for public pension plans.
Fact: The phrase "didn't bother" implies lack of attention. Congress did pay attention to public plan financing because of widely publicized horror stories in the 1970s and ordered a study. The results of the study were published in 1979, showing a large majority of public plans were following level-contribution financing. The air went out of the PERISA balloon.
In fact, there is an enforcement mechanism in place. State courts have shown the ability to require sponsors to adequately fund their plans. A recent case in point occurred in 1994 and involved the largest public plan in the nation - the California Public Employees' Retirement System.
For two consecutive years the state of California had not paid its contributions (about $1 billion) to the retirement system. This non-payment by the state was unprecedented, and the plan sued the state. The state argued that two years of zero contributions did not violate the long-standing retirement system law and practices of level contribution financing.
Fortunately, the court issued a sweeping decision Dec. 5 that the state must pay the missing contributions plus interest; it was an example of rational justice that didn't depend on the magic elixir of a federal law. Ironically, the state's expert actuarial witness was the same person who deplored the inadequate funding of public plans in the Dec. 26 commentary.
There are problems in public employee retirement plan activity; there are benefits in some plans that may be viewed as excessive; and there is unsound financing in some plans. While these plans are a minor part of the goal, their problems should be addressed. It seems unlikely, however, that good advice on solving problems can come from listening to inaccurate and sensationalist rhetoric.
Thomas J. Cavanaugh is chief executive officer at Gabriel Roeder Smith & Co., Southfield, Mich.